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India’s top information- technology (IT) services companies, all cash-rich, have been tightfisted about ploughing back their earnings in new projects or acquisitions and the bulk of the profits have been distributed to shareholders through dividend and share buybacks.
Illustration: Dominic Xavier/Rediff
In the past 10 years (that is, excluding the current one), the firms have reinvested in growth and expansion only around 13.5 per cent of the cash flow generated from their operations.
But, on average, nearly 73 per cent of cash profits have been returned to shareholders by way of dividend and share buybacks.
Tata Consultancy Services (TCS), Infosys, Wipro, HCL Technologies, and Tech Mahindra have cumulatively generated cash profits worth around Rs 8.9 trillion since 2015-16 (FY16) but they put only around Rs 1.2 trillion in gross block investment in the period.
Intangibles are generally created when firms make acquisitions. In comparison, shareholders cumulatively earned around Rs 6.46 trillion from these top five companies.
In other words, the industry paid Rs 5 to their shareholders for every Rs 1 reinvested in their businesses.
For example, in FY25, these companies together paid an equity dividend worth around Rs 91,600 crore, accounting for 76.2 per cent of their cash profits.
In comparison, they invested around Rs 9,650 crore in gross block, and that was 8 per cent of their cash profits.
The numbers suggest the industry accelerated the payout to shareholders in the post-pandemic period while reinvestment and spending on acquisitions slowed.
The ratio of investment in gross block to cash profit declined to an average of 6.7 per cent during the period FY21 to FY25 from 22 per cent in the period FY16 to FY20.
The ratio of dividend payout (including share buyback) to cash profit jumped, on average, to 76.7 per cent during FY21 to FY25 from 64.1 per cent in the preceding five years (FY16 to FY20).
The industry’s apparent lack of investment in new and emerging technologies such as artificial intelligence (AI), either organically or through overseas acquisition, has come under the scanner as individual companies are now struggling to grow.
TCS, the largest of the five, has announced plans to globally lay off nearly 12,000 employees, or around 2 per cent of its workforce, as it tries to shore up margins amid a slowdown in new orders from global clients.
This has raised fears of a layoff by others too as the industry’s business model faces disruption from AI deployment.
The combined revenues of these top five IT companies in FY25 were up just 4.9 per cent year-on-year (Y-o-Y), growing at the slowest pace since FY18.
But their combined net sales were up by 7.9 per cent, the best in the last three years, thanks to higher margins from a rationalisation in their employee cost.
The industry’s revenue slowed further to 3.8 per cent Y-o-Y in Q1FY26.
Analysts say that it’s tough to link growth with capex or investment, given its people-intensive nature.
“Indian IT companies, unlike Western tech giants, have a business model that depends on investment in people rather than in newer technologies or software products.
“The labour intensity of this model is declining due to the wider adoption of AI and other automation technologies, leading to redundancies in their workforce,” said Dhananjay Sinha, co-head (research and equity strategy), Systematix Institutional Equity.
According to him, the layoff by TCS is a business decision and should not be directly linked to its past investment decisions.
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